CUTTING COSTS FUNDS MORE FEATURES

BRUSSELS - The automakers have made dramatic cost cuts in the lower-medium segment, but even so earnings may be hard to find:

Selling prices are lower.

Capital investment for niche model derivatives is higher.

'The market has a way of taking away the cost savings,' said John Lawson, automotive analyst with Salomon Smith Barney in London.

Efficiency in design, manufacturing and purchasing contribute to lower costs.

Jacques Nasser, president of Ford Automotive Operations, said the Focus will be at least $1,000 less expensive to build than its predecessor, the Escort. GM credits modular construction for cutting costs of the new Astra by about 20 percent. Volkswagen Chairman Ferdinand Piech has boasted about the savings it would make thanks to anticipated volumes of the platform on which the Golf rides.

Two automakers gave customers some of the savings right away. Volkswagen started the trend last autumn, pricing the new Golf just a little higher than the old one, in spite of much better equipment. VW says the operating profit on the new Golf is DM1,100 ($600), while it was DM200 on its predecessor. GM followed with a similar strategy for the Astra, adding DM3,000 of equipment to the Astra while holding prices.

Ford has not priced the Focus. The car does not arrive until this autumn. For a year or two, Ford is keeping the Escort in production. In the short term, Ford may be able to price the radically designed Focus higher and let the Escort compete on price.

Volume is the key to any profits that might be made. All three carmakers plan to sell their cars in many markets. Volkswagen anticipates selling as many as two million units a year of its A platform, which includes the VW Golf and Vento/Jetta, the Seat Toledo, the VW New Beetle, the Audi A3, the Brazilian VW Gol replacement and the Skoda Octavia.

At the same time, each car will be made in more varieties. Coupes, convertibles and compact minivans compete in new niches but add to development costs. Their makers will offer 23 versions of the new cars, compared with 18 of their predecessors.

Because the three cars arrive within 12 months of each other, pricing has been aggressive from the start.

'This time around the C-segment (lower-medium) will not yield the same profits as the last generation because there has been a heap of money spent to replace them in the same time period,' said Lawson.

VW spent DM3 billion on the Wolfsburg plant alone, for a new stamping shop, body shop with 1,350 robots, and assembly lines. General Motors spent DM4.1 billion. Ford, stung by criticism when it revealed the $6 billion cost for the Mondeo, will not reveal its investment in the Focus.

Within Europe, the increased number of variants will fragment the segment without necessarily increasing total sales. Thus, to gain volume, the automakers must look to the globe.

Volkswagen appears to be in the best position to earn money with its volume leader.

The Golf is a world car, built in four European plants, Brazil and Mexico.

'Their operating profit on the new car - even with their aggressive pricing - is probably six times as high and a dramatic increase,' said one London-based analyst who preferred not to be named. 'With modular assembly, purchasing efficiency and the volume effect across the entire segment, VW already has the best margins of the European makes, over 5 percent.'

Because Audi, Seat and Skoda use the platform, the Golf may lose customers over its lifetime and ultimately lower the per-unit profits, said Lawson. 'VW has given consumers the opportunity to buy one of the other brands,' he said. 'Even reaching the previous Golf's volumes may be a challenge.'

The Astra is nearly a world car. It will be marketed everywhere but the USA. A dozen factories will build the car, including those in Poland, Brazil, Hungary, South Africa and Taiwan. Worldwide sales this year are expected to reach 750,000 units, rising to about one million within two years.

An increased use of modules has cut assembly time. The new Astra uses 40 modules, the old one 15. Even with more content and features, it takes 15-20 percent less time to assemble a new Astra than its predecessor, said Arturo Elias, vehicle line executive for GM compact cars.

Other cost savings come from sourcing components for the UK factory from Germany, said Peter Schmidt, an analyst with Automotive Industries Data. And GM's leanest factory, in Eisenach, Germany, is converting from Corsa to Astra production.

'They've done a transformation with the Astra and GM will undoubtedly make money,' said Schmidt.

Ford's Focus doesn't go on sale until this fall, and details about the program are scarce.

Nasser said the spending was lower on the Focus than on the Mondeo. 'We have made tremendous improvement worldwide,' he said, 'in the double digits.'

The Focus will be built in two European plants and at least one in North America.

GM avoids the question of whether the same car can sell in North America and Europe. The Volkswagen Golf leads the segment in Europe but is a minor player in North America. Ford counts on significant volume in both continents, and that worries some analysts.

'If the car is to be competitive in western Europe as the Focus, it will be too sophisticated and expensive for the USA,' said Schmidt. 'What US buyers don't want is a high price. Ford will have to take features and value out of the Focus for the USA because otherwise it could be a flop.'

But Stephen Girsky, an analyst with Morgan Stanley in New York, thinks Ford will solve the problem with volume. Using the same parts in different markets will drive the component price down and allow car prices to be kept low.

If volume is the solution, it is also the question.

If Ford can't develop a car that will achieve high volumes on two continents, said Schmidt, 'then there is a real question mark about whether the world concept is ever realizable.'